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(Reuters) - British engineering group GKN, seeking to fend off a hostile takeover bid, pledged to return 2.5 billion pounds to shareholders over the next three years following a review of its business.

GKN, facing a 7.4 billion pound hostile bid from turnaround specialist Melrose Industries, said last month it would separate its aerospace and automotive divisions to try to improve profitability.

Investors had been calling for GKN to split its businesses as management persistently failed to meet targets to improve profit and cash flow despite growing sales. GKN issued a profit warning in October, which was sparked by the difficulties at its aerospace business.

The company said on Wednesday it began an operational separation of the divisions.

GKN, which makes parts for the Boeing 737 jet, Black Hawk helicopter and components for Volkswagen and Ford cars, says it also expects to deliver a recurring annual cash benefit of 340 million pounds from the end of 2020 from its cash improvement initiative, known as Project Boost.

"This strategy is expected to generate significant cash for shareholders in the short term and meaningful sustainable cash flows over the mid to long term," said Chief Executive Anne Stevens.

Stevens, appointed last month on a permanent basis, added that a significant part of the cash benefits is expected to come from divestments within the first 12 to 18 months.

Melrose made a firm offer to buy GKN on Jan. 17 valued at 430.1 pence per share or 7.4 billion pounds, which GKN swiftly rejected the same day.

Melrose's offer for GKN consists of 1.49 new Melrose shares and 81 pence per GKN share.